The FEMA ACT, 1999

Table of content:

Introduction of FEMA ACT - CA Inter Law
Salient Features of the Act: It provides for-
RESIDENTIAL STATUS UNDER FEMA, 1999
REGULATION AND MANAGEMENT OF FOREIGN EXCHANGE
SCHEDULE I
SCHEDULE II
SCHEDULE III

Introduction of FEMA ACT, 1999 - CA Inter Law

The change in the economic scenario, globalization of capital, free trade across the globe, necessitated the need for managing foreign exchange in the country in an orderly manner. To facilitate cross border trade and cross border capital flows, exchange control law was required. Foreign exchange control led to introduction of exchange control law through Defense of India rules by the Britishers in 1939. Subsequently, Foreign Exchange Regulation Act (FERA) was enacted in 1947 which was later replaced with 'the Foreign Exchange Regulation Act, 1973' (FERA).

Salient Features of the Act: It provides for-

 Regulation of transactions between residents and non-residents
 Investments in India by non-residents and overseas investments by Indian residents
 Freely permissible transactions on current account subject to reasonable restrictions that may be imposed
 Reserve Bank of India (RBI) and Central Government control over capital account transactions
 Requirement for realisation of export proceeds and repatriation to India
 Dealing in foreign exchange through 'Authorised Persons' like Authorised Dealer/ Money Changer/ Off-shore banking unit
 Adjudication and Compounding of Offences
 Investigation of offences by Directorate of Enforcement
 Appeal provisions including Special Director (Appeals) and Appellate Tribunal.

RESIDENTIAL STATUS UNDER FEMA, 1999

The definition of “person” is similar to the definition contained in the Income-tax Act, 1961. The term ‘person’ includes entities such as companies, firms, individuals, HUF, Association of Persons (AOP), artificial juridical persons agencies, as well as offices and branches. Agencies, offices and branches do not have independent status separate from their owners. Yet these have been considered as persons. Under FEMA such offices and branches are included in definition of Person Resident in India. Therefore, they have been included in the definition of “Person”.

The term ‘person resident in India’ means the following entities:

1. A person who resides in India for more than 182 days during the preceding financial year;

A. A person who has gone out of India or stays outside India for any of the three purposes given below,
B. A person who has come to or stays in India OTHERWISE THAN for any of the three purposes given below;

2. Any person or body corporate registered or incorporated in India;

3. An office, branch or agency in India owned or controlled by a person resident outside India;

4. An office, branch or agency outside India owned or controlled by a person resident in India.

Person resident outside India means a person who is not resident in India.

REGULATION AND MANAGEMENT OF FOREIGN EXCHANGE

Section 3 - Dealing in foreign exchange, etc.

Section 4 - Holding of foreign exchange

Section 5 - Current account transactions

Section 3 - Dealing in foreign exchange, etc.

No person shall-
(a) deal in or transfer any foreign exchange or foreign security to any person not being an authorised person (AP);
(b) make any payment to or for the credit of any person resident outside India in any manner;
(c) receive otherwise than through an authorised person, any payment by order or on behalf of any person resident outside India in any manner.

(d) enter into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire, any asset outside India by any person.

Section 4 -Holding of foreign exchange

Except as provided in this Act, no person resident in India shall acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India. This section prevents Indian residents to acquire, hold, own, possess or transfer any foreign exchange, foreign security or immovable property abroad. Then through separate notifications, acquisition of these assets has been permitted subject to certain conditions and compliance rules.

Section 5 - Current account transactions

The term ‘Current Account Transaction’ is defined negatively by Section 2(j) of the Act. It means a transaction other than a capital account transaction and includes the following types of transactions:
(i) Payments in the course of ordinary course of foreign trade, other services such as short-term banking and credit facilities in the ordinary course of business etc.
(ii) Payments in the form of interest on loans or income from investments.
(iii) Remittances for living expenses of parents, spouse, or children living abroad
(iv) Expenses in connection with foreign travel, education etc.

SCHEDULE I

Transactions for which drawal of foreign exchange is prohibited:
(i) Remittance out of lottery winnings.
(ii) Remittance of income from racing/riding, etc., or any other hobby.
(iii) Remittance for purchase of lottery tickets, banned/prescribed magazines, football pools, sweepstakes etc.
(iv) Payment of commission on exports made towards equity investment in Joint Ventures/Wholly Owned Subsidiaries abroad of Indian companies.
(v) Remittance of dividend by any company to which the requirement of dividend balancing is applicable.
(vi) Payment of commission on exports under Rupee State Credit Route, except commission up to 10% of invoice value of exports of tea and tobacco.
(vii) Payment related to “Call Back Services” of telephones.
(viii) Remittance of interest income on funds held in Non-resident Special Rupee Scheme a/c.

SCHEDULE II

Transactions, which require prior approval of the Government of India for drawal
of foreign exchange:

SCHEDULE III

Facilities for individuals—Individuals can avail of foreign exchange facility for the following purposes within the limit of USD 250,000 only.:
(i) Private visits to any country (except Nepal and Bhutan)
(ii) Gift or donation.
(iii) Going abroad for employment
(iv) Emigration
(v) Maintenance of close relatives abroad
(vi) Travel for business or attending a conference or specialised training or for meeting expenses for meeting medical expenses, or check-up abroad, or for accompanying as attendant to a patient going abroad for medical treatment/ check-up.

(vii) Expenses in connection with medical treatment abroad
(viii) Studies abroad
(ix) Any other current account transaction

Any additional remittance in excess of the said limit for the said purposes shall require prior approval of the Reserve Bank of India.

However, for the purposes mentioned at item numbers (iv), (vii) and (viii) above, the individual may avail of exchange facility for an amount in excess of the limit prescribed under the Liberalised Remittance Scheme as provided in regulation 4 to FEMA Notification 1/2000-RB, dated the 3rd May, 2000 (here in after referred to as the said Liberalised Remittance Scheme) if it is so required by a country of emigration, medical institute offering treatment or the university, respectively:

Further, if an individual remits any amount under the said Liberalised Remittance Scheme in a financial year, then the applicable limit for such individual would be reduced from USD 250,000 (US Dollars Two Hundred and Fifty Thousand Only) by the amount so remitted: Further, that for a person who is resident but not permanently resident in India and-
(a) is a citizen of a foreign State other than Pakistan; or
(b) is a citizen of India, who is on deputation to the office or branch of a foreign company or subsidiary or joint venture in India of such foreign company, may make remittance up to his net salary (after deduction of taxes, contribution to provident fund and other deductions).

Conclusion of FEMA ACT - CA Inter Law

In conclusion, the Foreign Exchange Management Act (FEMA) serves as a crucial regulatory framework governing foreign exchange transactions in India. Enacted to manage the complexities of cross-border trade and capital flows, FEMA has evolved to adapt to the changing global economic landscape. By providing guidelines for dealing in foreign exchange, regulating capital and current account transactions, and delineating residential status, FEMA ensures the orderly conduct of international financial activities. Understanding FEMA's provisions is essential for businesses, individuals, and regulatory authorities alike, enabling them to navigate the intricacies of foreign exchange management and uphold the integrity of India's financial system in an increasingly interconnected world.

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